Congress Tackles the Risky Loan Shortage


Here's the New York Times summary of the housing legislation Congress is on the verge of approving:

The centerpiece of the Senate package is a rescue-refinancing plan aimed at stemming the tide of more than 8,000 new foreclosures a day that lenders are filing across the country. The plan would allow distressed borrowers and their lenders to stem losses by allowing qualified owners to refinance into more affordable, 30-year fixed-rate loans with a federal guarantee.

The legislation would also provide benefits for first-time buyers, who would receive a refundable tax credit of up to $8,000, or 10 percent of the value of a home, on purchases of unoccupied housing.

As part of a regulatory overhaul of Fannie Mae and Freddie Mac, the mortgage finance giants, the bill would permanently increase to $625,000, from $417,000, the limit on loans they can purchase from lenders in expensive housing markets, making it easier for borrowers to obtain mortgages at discounted rates.

Problem: Lots of people took out loans they could not afford to buy houses that subsequently declined in value.

Solution: Bail out borrowers and lenders, putting taxpayers on the hook for the bad loans; increase subsidies for home purchases; and make it easier to take out big mortgages.

What could possibly go wrong?